Boeing 2006 Annual Report Download

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Charting the
Course 2006
THE BOEING COMPANY
ANNUAL REPORT

Table of contents

  • Page 1
    Charting the 2006 Course THE BOEING COM PANY ANNUAL REPORT

  • Page 2
    ... Airplanes Boeing Integrated Defense Systems 2007 Initiative Spotlight: Internal Services Productivity Serving Our Customers 16 18 20 84 91 92 93 Global Presence Technology Development Financials Selected Programs, Products and Services Board of Directors Company Officers Shareholder Information

  • Page 3
    ...shareholder return. R R Increased total backlog by 22 percent to a record $250 billion. R R Increased dividend by 17 percent. Generated a record $7.5 billion of operating cash flow, allowing us to fully fund our pension plans, buy back approximately $2.0 billion in stock and invest in new products...

  • Page 4
    Message From Our Chairman 2

  • Page 5
    ... delivered product, continue our strong sales and improve financial performance in the years immediately ahead. Boeing's stock price increased 26.5 percent over the course of 2006, and for the fourth consecutive year, we have delivered 25 percent or greater total shareholder return. At the end of...

  • Page 6
    ...are a stronger company as a result. To review: R R We took a $320 million charge to shut down Connexion by Boeing. We absorbed the impact of cost and schedule growth on some fixed-price development programs in our defense business. R We increased our research-anddevelopment spending for 2006 and...

  • Page 7
    ... stock price and reputation will take care of themselves. level, focusing on long-term growth, constantly improving our productivity, and developing our people's leadership capabilities. We're applying a time-tested model for organic growth. First, we're concentrating on growing our core businesses...

  • Page 8
    ...do to increase growth and improve productivity, we are in a very strong position as we begin that work. As a company, we look forward to helping to shape a better future that will benefit all of our stakeholders - our customers, shareholders, supplier partners, employees and the communities in which...

  • Page 9
    ..., Boeing International Tod R. Hullin Senior Vice President, Public Policy Shephard W. Hill Senior Vice President, Business Development and Strategy John J. Tracy Senior Vice President, Engineering, Operations and Technology James A. Bell Executive Vice President, Chief Financial Officer 7

  • Page 10
    Boeing Commercial Airplanes

  • Page 11
    ... to invest in airplanes that meet our customers' needs now and in the future while continuously improving our production systems to enhance quality and efficiency. Our development programs follow our view of where the market is going - point-to-point, high-frequency air travel, with airplanes that...

  • Page 12
    ... to address changing global markets and shifting customer requirements. This adaptability has created new opportunities, including an increased customer emphasis on network-centric capabilities and less reliance on sheer numbers of planes, ships and tanks. Boeing Integrated Defense Systems is...

  • Page 13
    Integrated Defense Systems

  • Page 14
    2007 Initiative Spotlight: Internal Services Productivity

  • Page 15
    ...and technical risks. R Boeing Shared Services Supplier Management partnered with the 787 Dreamliner team to consolidate and competitively bid a logistics contract for final assembly and delivery of certain parts and materials. Doing so reduced costs by 65 percent for a projected 10-year savings of...

  • Page 16
    ... commercial customers to our Airplane Health Management, Maintenance Performance Toolbox and Electronic Flight Bag programs this year. Several new partners joined the global service team for GoldCare, our comprehensive life cycle management service developed for the 787 Dreamliner. Key acquisitions...

  • Page 17
    Serving Our Customers

  • Page 18
    Global Presence

  • Page 19
    ... to innovate and introduce technologies that open opportunities for growth. Global supplier partnerships are critical to the success of programs such as the 787 Dreamliner, which includes suppliers and partners from more than a dozen countries. We continue to lower operating costs and strengthen our...

  • Page 20
    ... development programs - like the 787, 747-8, Future Combat Systems and EA-18G programs. In turn, Boeing's advanced R&D unit - Phantom Works - is better able to focus its investments on meeting the midto long-term needs for advanced technologies in such areas as design, analysis, avionics, materials...

  • Page 21
    Technology Development

  • Page 22
    ... Registered Public Accounting Firm Report of Management Regulatory Certifications Index to Financials Selected Programs, Products and Services Board of Directors Company Officers Shareholder Information 22 23 24 40 41 42 43 44 Comparison of Cumulative* Five-Year Total Shareholder Returns $250...

  • Page 23
    ... 2004 sale of assets from BCC's Commercial Financial Services to General Electric Capital Corporation. *GAAP diluted earnings per share and adjusted earnings per share exclude the pro-forma impact of 29 missed commercial aircraft deliveries as a result of the International Association of Machinists...

  • Page 24
    ...Systems Network and Space Systems Support Systems Total Integrated Defense Systems Boeing Capital Corporation (c) Other Accounting differences/eliminations Total revenues General and administrative expense (c) Research and development expense Other income, net Net earnings from continuing operations...

  • Page 25
    ... program; the ability to successfully develop and timely produce the 787 aircraft; the effect of political and legal processes, changing priorities or reductions in the U.S. Government or international government defense and space budgets on our revenues from our Integrated Defense System business...

  • Page 26
    ... of Operations Consolidated Results of Operations and Financial Condition Overview We are a global market leader in design, development, manufacturing, sale and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services. We...

  • Page 27
    ... compensation expense due to an increase in the number of performance shares meeting the price growth targets and being converted to common stock. Other Earnings Items (Dollars in millions) Year ended December 31, 2006 2005 2004 Earnings from operations Other income, net Interest and debt expense...

  • Page 28
    ..., Airbus can use the extra efficiency to develop new products and gain market share. We are focused on improving our processes and continuing cost-reduction efforts. We continue to leverage our extensive customer support services network which includes aviation support, spares, training, maintenance...

  • Page 29
    ..., letters of intent from prospective customers, and market studies. We review our program accounting quantities quarterly. Commercial aircraft production costs include a significant amount of infrastructure costs, a portion of which do not vary with production rates. As the amount of time needed...

  • Page 30
    ... aircraft. They include flight and maintenance training, field service support costs, engineering services and technical data and documents. The costs for fleet support are expensed as incurred and have been historically less than 1.5% of total consolidated costs of products and services. This level...

  • Page 31
    ...able to fully fund the hardware programs already in development as well as new initiatives in order to address the capability gaps identified in the 2006 QDR. This imbalance between future costs of hardware programs and expected funding levels is not uncommon in the U.S. DoD and is routinely managed...

  • Page 32
    ... Joint Tactical Radio System (JTRS), Family of Beyond Line-of-Sight Terminals, and the E/A-18G. Some of our development programs are contracted on a fixed-price basis. Many of these programs have highly complex designs. As technical or quality issues arise, we may experience schedule delays and cost...

  • Page 33
    ... made to support various intelligence, surveillance, and reconnaissance business opportunities including P-8A and AEW&C aircraft. Other research and development efforts include upgrade and technology insertions to network-enable and enhance the capability and competitiveness of current product lines...

  • Page 34
    ... space intelligence systems. Along with increased funding to support these areas of architecture and network-centric capabilities development, we also maintained our investment levels in global missile defense and advanced missile defense concepts and technologies. Backlog N&SS total backlog...

  • Page 35
    ... mix. Research and Development Support Systems continues to focus investment strategies on its core businesses including Engineering and Logistic Services, MM&U, Supply Chain Services, Training and Support Systems, and Advanced Logistics Services, as well as on moving into the innovative Network...

  • Page 36
    ...several operating lease aircraft by a customer. Liquidity and Capital Resources Cash Flow Summary (Dollars in millions) Year ended December 31, 2006 2005 2004 BCC Customer Financing and $8,034 Investment Portfolio 2.4% Valuation Allowance as a % of Total Receivables $5,590 Debt Debt-to-Equity Ratio...

  • Page 37
    Management's Discussion and Analysis customer financing, and low income tax payments which were partially offset by a decrease in accounts payable and other liability. Net cash provided by operating activities increased to $7,000 million in 2005 from $3,504 million in 2004 primarily due to lower ...

  • Page 38
    ... must be competitive in cost, quality and schedule. Purchase Obligations Recorded on the Consolidated Statement of Financial Position Purchase obligations recorded on the Consolidated Statement of Financial Position primarily include accounts payable and certain other liabilities including accrued...

  • Page 39
    ..., sales price, labor and employee benefit costs, material costs, procured parts, major component costs, overhead costs, program tooling costs, and routine warranty costs. Underlying all estimates used for program accounting is the forecasted market and corresponding production rates. Estimation...

  • Page 40
    ... cash flow including our intention to hold or dispose of an asset before the end of its economic useful life, the expected future lease rates, lease terms, residual value of the aircraft or equipment, periods in which the asset may be held in preparation for a follow-on lease, maintenance costs...

  • Page 41
    ... with suppliers, labor agreements, and general market conditions. Changes in these forecasts could significantly change the amount of impairment recorded, if any. The cash flow forecasts are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control...

  • Page 42
    ... changes. Additionally, Boeing Capital Corporation (BCC) uses interest rate swaps with certain debt obligations to manage exposure to interest rate changes. The principal source of BCC's market risk relates to interest rate changes. This risk is managed by matching the profile of BCC's liabilities...

  • Page 43
    ... 2005 2004 Sales of products Sales of services Total revenues Cost of products Cost of services Boeing Capital Corporation interest expense Total costs and expenses Income from operating investments, net General and administrative expense Research and development expense, net of credits of $160...

  • Page 44
    ... related costs Income taxes payable Short-term debt and current portion of long-term debt Total current liabilities Deferred income taxes Accrued retiree health care Accrued pension plan liability Other long-term liabilities Long-term debt Shareholders' equity: Common shares issued, par value $5.00...

  • Page 45
    ...excess of related costs Income taxes receivable, payable and deferred Other long-term liabilities Prepaid pension expense Goodwill Other acquired intangibles Accrued retiree health care Customer financing Other Net cash provided by operating activities Cash flows - investing activities: Discontinued...

  • Page 46
    ... reclassification of deferred compensation Changes in capital stock ShareValue Trust market value adjustment Excess tax pools Treasury shares issued for share-based plans, net Treasury shares repurchased Net earnings Cash dividends declared ($1.05 per share) Minimum pension liability adjustment, net...

  • Page 47
    ... Accounting differences/eliminations Total revenues Earnings from operations: Commercial Airplanes Integrated Defense Systems: Precision Engagement and Mobility Systems Network and Space Systems Support Systems Total Integrated Defense Systems Boeing Capital Corporation Other Unallocated expense...

  • Page 48
    ... for which changes in the near term are considered reasonably possible and that may have a material impact on the financial statements are disclosed in these notes to the consolidated financial statements. Operating Cycle For classification of certain current assets and liabilities, we use the...

  • Page 49
    ... aircraft. Lease and financing revenue arrangements are also included in Sales of services on the Consolidated Statements of Operations. Service revenue and associated cost of sales from pay-in-advance subscription fees are deferred and recognized as services are rendered. Financial Services Revenue...

  • Page 50
    ...periodic cost of our pension and other postretirement plans is determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate, the long-term rate of asset return, and medical trend (rate of growth for medical costs). A portion...

  • Page 51
    ... the program accounting quantity. When estimated costs to complete exceed estimated program revenues to go, a loss provision is recorded. Used aircraft purchased by the Commercial Airplanes segment and general stock materials are stated at cost not in excess of net realizable value. See "Aircraft...

  • Page 52
    ... No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). Long-lived assets held for sale are stated at the lower of cost or fair value less cost to sell. Long-lived assets held for use are subject to an impairment assessment whenever events or changes in circumstances...

  • Page 53
    ... Sale Aircraft but prior to the purchase of the used trade-in aircraft. Estimates based on current aircraft values are included in Accounts payable and other liabilities. The fair value of trade-in aircraft is determined using aircraft specific data such as model age and condition, market conditions...

  • Page 54
    ... cash flow including our intention to hold or dispose of an asset before the end of its economic useful life, the expected future lease rates, lease terms, residual value of the aircraft or equipment, periods in which the asset may be held in preparation for a follow-on lease, maintenance costs...

  • Page 55
    ... (primarily contractual supplier and customer relationships)* Indefinite-lived intangible assets not subject to amortization (Aviall brand and trade names) Other assets Accounts payable Other current liabilities Debt acquired and repaid Other long-term liabilities Total net assets acquired $÷«200...

  • Page 56
    ... tax Global Settlement with U.S. Department of Justice Foreign Sales Corporation/ Extraterritorial Income tax benefit Research benefit Federal audit settlement State income tax provision, net of effect on U.S. federal tax Change in valuation allowances Other provision adjustments Income tax expense...

  • Page 57
    ...issues for U.S. federal, U.S. state, and taxation of non-U.S. earnings as follows: Retiree health care accruals Inventory and long-term contract methods of income recognition Other employee benefits accruals In-process research and development related to acquisitions Net operating loss, credit, and...

  • Page 58
    ...Long-term contracts in progress Commercial aircraft programs Commercial spare parts, used aircraft, general stock materials and other Less advances and progress billings $«12,329 8,743 2,888 23,960 (15,855) $«««8,105 $«14,194 7,745 2,235 24,174 (16,296) $«««7,878 Deferred production costs...

  • Page 59
    ... an asset purchase agreement. This divestiture includes assets and sites in California, Alabama, Mississippi, and Florida. The Rocketdyne business primarily develops and builds rocket engines and provides booster engines for the space shuttle and the Delta family as well as propulsion systems for...

  • Page 60
    Notes to Consolidated Financial Statements The components of investment in sales-type/finance leases at December 31 were as follows: 2006 2005 The change in the allowance for losses on receivables for the years ended December 31, 2006, 2005 and 2004, consisted of the following: Allowance for ...

  • Page 61
    ... would have a material adverse effect on our earnings, cash flows and/or financial position. Scheduled payments on customer financing are as follows: Principal Payments on Notes Receivable Sales-Type/ Finance Lease Payments Receivable Operating Lease Equipment Payments Receivable terms of one year...

  • Page 62
    ... this anomaly will have a material adverse impact on our results of operations, financial position, or cash flows. Other Investments During 2005, we recorded an asset impairment charge of $42 in Other Income related to the sale of certain investments in technology related funds for proceeds of $24...

  • Page 63
    ... of BCC's cash position and other available funding sources, BCC determined during 2004 that it was unlikely they would need to use this program in the foreseeable future. The program is thus inactive but available with updated registration statements. Senior Unsecured Debt Securities Capital lease...

  • Page 64
    ... Deferred income taxes Total current assets Prepaid pension expense Deferred income taxes Investments Other assets Total assets Accounts payable and other liabilities Total current liabilities Deferred taxes Accrued retiree healthcare Accrued pension plan liability Other long-term liabilities...

  • Page 65
    ... in statement of financial position at December 31, consist of: Prepaid benefit cost Intangible asset Other assets Accumulated other comprehensive loss to offset additional minimum liability Accounts payable and other liabilities Accrued retiree health care Accrued pension plan liability Net...

  • Page 66
    ... of each plan's liabilities. Previously, we determined a single discount rate for all our postretirement benefit plans. We made the change mainly Effect on postretirement benefit obligation Effect on total of service and interest cost $683 58 $(653) (50) 64 The Boeing Company and Subsidiaries

  • Page 67
    Notes to Consolidated Financial Statements Plan Assets Pension assets totaled $46,203 and $43,484 at September 30, 2006 and 2005. In late 2006, the pension asset strategy was modified, with a goal to reduce volatility relative to pension liabilities, achieve a competitive investment return, achieve...

  • Page 68
    ... is a change in control of the Company which is not approved by the Board of Directors and the plans are terminated within five years thereafter, the assets in the plan first will be used to provide the level of retirement benefits required by ERISA, and then any surplus will be used to fund a trust...

  • Page 69
    Notes to Consolidated Financial Statements Additionally, prior to the adoption of SFAS No. 123R, we amortized compensation cost for share-based awards over the stated vesting period for retirement eligible employees and, if an employee retired before the end of the vesting period, we recognized any...

  • Page 70
    ... Shares that have a cash settlement feature as liability awards beginning September 30, 2005. Liability awards vesting and transferred into deferred compensation plans totaled $98 and $9 for the years ended December 31, 2006 and 2005. The key assumptions used for valuing Performance Shares...

  • Page 71
    ... holds our common stock, receives dividends and distributes to employees the appreciation in value above a 3% per annum threshold rate of return at the end of each period. The total compensation expense to be recognized over the life of the trust was determined using a binomial option-pricing model...

  • Page 72
    .... As of December 31, 2006 and 2005, the deferred compensation liability which is being marked to market was $1,505 and $1,348. Note 17 - Shareholders' Equity The Company's 2005 stock repurchase program was terminated by resolution of our Board of Directors on August 28, 2006 and replaced with...

  • Page 73
    ... under which we agree to pay fixed rates of interest are designated as cash flow hedges of variable-rate debt obligations. We use foreign currency forward contracts to manage currency risk associated with certain forecasted transactions, specifically sales and purchase commitments made in foreign...

  • Page 74
    ...Consolidated Financial Statements Contingent Repurchase Commitments In conjunction with signing a definitive agreement for the sale of new aircraft (Sale Aircraft), we have entered into contingent repurchase commitments with certain customers. Under such commitments, we agree to repurchase the Sale...

  • Page 75
    ...the purchase and/or construction of real and personal property at our Wichita site. Tax benefits associated with IRBs include a ten-year property tax abatement and a sales tax exemption from the Kansas Department of Revenue. We record the property on our Consolidated Statements of Financial Position...

  • Page 76
    ...'s contract for development and initial production of the A-12 aircraft. The Team filed a legal action to contest the Navy's default termination, to assert its rights to convert the termination to one for "the convenience of the Government," and to obtain payment for work done and costs incurred on...

  • Page 77
    ...outcome in this matter would have a material adverse impact on our financial position. BSSI/ICO Litigation On August 16, 2004, Boeing Satellite Systems International, Inc. (BSSI) filed a complaint for declaratory relief against ICO Global Communications (Operations), Ltd. (ICO) in Los Angeles County...

  • Page 78
    ... into specified-price trade-in commitments with certain customers that give them the right to trade in their used aircraft for the purchase of Sale Aircraft. The total contractual trade-in value was $1,162 and $1,395 as of December 31, 2006 and 2005. Based on the best market information available at...

  • Page 79
    ... and Mobility Systems, Network and Space Systems, and Support Systems, collectively IDS; and BCC. All other activities fall within the Other segment, principally made up of Engineering, Operations and Technology (formerly, Boeing Technology), Connexion by BoeingSM and our Shared Services Group. On...

  • Page 80
    ...' internal financial reporting used for corporate management purposes. Research and Development Expense Year ended December 31, 2006 2005 2004 Commercial Airplanes Integrated Defense Systems: Precision Engagement and Mobility Systems Network and Space Systems Support Systems Total Integrated...

  • Page 81
    ... to Shared Services Group assets and segment assets managed by Shared Services Group, primarily IDS. Commercial Airplanes Integrated Defense Systems: Precision Engagement and Mobility Systems Network and Space Systems Support Systems Total Integrated Defense Systems Boeing Capital Corporation Other...

  • Page 82
    ... business to United Technologies and recorded a net-pretax gain of $578. We also received a tax refund of $537, which resulted in an increase to net income of $406. During the second quarter of 2005, we had a pre-tax, primarily non-cash, charge of $103 resulting from Commercial Airplanes' sale...

  • Page 83
    ...The Boeing Company Chicago, Illinois We have audited the accompanying consolidated statements of financial position of The Boeing Company and subsidiaries (the "Company") as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders' equity, and cash flows for...

  • Page 84
    ... manner. The system of internal control and disclosure control include widely communicated statement of policies and business practices which are designed to require all employees to maintain high ethical standards in the conduct of Company affairs. The internal controls and disclosure controls are...

  • Page 85
    ... Research and development, Network and Space Systems Research and development, Precision Engagement and Mobility Systems Research and development, Support Systems Risk, significant group concentrations of Segment information Segment results of operations and financial condition Service revenue Share...

  • Page 86
    ... in fuel use and operating costs. Its exceptional performance will come from improvements in engine technology, aerodynamics, materials and systems. It will be the most Boeing Commercial Aviation Services provides the most complete range of products and services aimed at bringing even more value to...

  • Page 87
    ... plans to acquire a total of 12 C-17s. Australia took delivery of its first Globemaster III in November 2006. 2006 deliveries: 16 U.S. government officials. Four C-32As currently are in service, and Boeing is providing a major communications upgrade to all four aircraft. Airborne Laser (ABL...

  • Page 88
    ... vehicle programs, including mission management, support, engineering, vehicle production, test and launch operations and the people whose intellectual capital will enable the new venture, ULA provides satellite launch services to U.S. government customers. Boeing continues to offer the Delta family...

  • Page 89
    ... anti-ship missions. To strike targets on land and ships in port, the missile uses GPSaided inertial navigation to hit a designated target aim point. The 226.8-kilogram (500-pound) blast partner Science Applications International Corporation function as the lead systems integrator for FCS, managing...

  • Page 90
    ...8A Poseidon System Development and Demonstration contract for the aircraft in June 2004. A Boeing proposal for the P-8I was selected in December 2006 to proceed to the field evaluation phase of the Indian navy's competition. The P-8A Critical Design Review is scheduled for 2007. Sea Launch Company...

  • Page 91
    ... at mission end, and operate and maintain associated facilities and ground systems. Boeing has processed every Space Shuttle payload since the first flight in 1981 and prepares every component of the International Space Station before it leaves Earth. modification design, engineering support to...

  • Page 92
    ... customers around the world. Working with Boeing's business units, Boeing Capital is committed to helping customers obtain efficient financing for Boeing products and services. To ensure adequate availability of capital funding, Boeing Capital is leading efforts to improve the international...

  • Page 93
    ...University, St. Louis, Missouri Director of National Bureau of Economic Research John E. Bryson, 63 Chairman of the Board, President and Chief Executive Officer, Edison International Boeing Board Committees: Compensation; Governance, Organization and Nominating Boeing director since 1995 Director of...

  • Page 94
    ... and Chief Executive Officer Bonnie W. Soodik Senior Vice President, Office of Internal Governance Richard D. Stephens Senior Vice President, Human Resources and Administration John J. Tracy Senior Vice President, Engineering, Operations and Technology *Appointed Officer 92 The Boeing Company and...

  • Page 95
    ... web site address). They can view their account history, change their address, certify their tax identification number, replace checks, request duplicate statements, consent to receive their proxy voting materials and other shareholder communications electronically, make additional investments and...

  • Page 96
    The Boeing Company 100 North Riverside Plaza Chicago, IL 60606-1596 U.S.A. 0707-AR-07